Ask anyone involved in international licensing to peg the next hot territory and you’ll likely get Russia and/or Central and Eastern Europe as the response. To be sure, with a population of 140 million, solid GDP growth and a burgeoning middle class, Russia offers a lot of promise for consumer products players. However, a closer look reveals conditions in the country won’t soon yield that combination of widespread consumer awareness and mature retail infrastructure that often spawns a big licensing hit. So what challenges await hopeful kids property owners entering the region right now?

Lay of the land
According to International Licensing: A Status Report from New York-based EPM Communications, licensed merchandise sales generated US$329 million at retail in Central and Eastern Europe in 2008, up 2.8% from 2007. Approximately US$100 million of those sales came from Russia, which accounts for roughly 40% of CEE’s population.

And when it comes to current licensed faves, kid- and tween-targeted properties seem to be having the most success right now. Dmitry Gordinsky, country manager for Copenhagen-based licensing agent Kidz Entertainment/EEMC, says IPs that appeal to teens or adults don’t work in Russia because the older demographics simply aren’t as brand-conscious as their younger counterparts. For its part, EPM found that entertainment/character licensing accounts for a little less than half of licensed merch sales in CEE, with publishing (25%) sitting as the strongest category, followed by food/beverage (16%), apparel/accessories/footwear (14%) and gifts/novelties (13%).

With key kids category toys, market researcher The NPD Group notes Russia stood as the 14th-largest market in the world in 2008.NPD’s global SVP of toys Jane Zimmy points out that the number of children – zero to four and five to nine – is expected to grow and the bulk of the country’s wealth is concentrated in a minority of the population. As such, major brands in all categories ‘tend to have a disproportionate appeal to this population segment, which might bode well for the licensed market,’ she reasons.

That said, there’s much headway to be made with potential local licensing partners. Russian manufacturers haven’t seen the use for licensing in the past. As Kidz/EEMC president of entertainment Claus Tømming puts it, manufacturers with healthy sales perceived licensing and its attendant royalty payments and promotional efforts as a complication. But the sagging economy may be turning things around. When companies really started taking a hit last year, Tømming says, it forced them to look at solutions to build sales – licensing has been tapped as one of them.

Educating local licensees
Despite the current interest among Russian manufacturers in licensing, introducing the concept hasn’t been easy and much time and patience have been expended to bring the local market up to speed. The born-and-bred Russian outfits remain a key focus for major licensors as they have a much stronger hold on retail distribution channels than international conglomerates.

European Licensing Company’s CEO Hakan Durdag estimates it takes an average of two to three meetings just to sell potential licensees on the idea of licensing. (Headquartered in Hungary, ELC set up a Moscow office four years ago.) As for which manufacturers are biting, he says it tends to be those dealing in higher-end goods. ‘Consumers expect better quality from licensed goods, I think, because they’re looking at product as a collaboration between a Russian company and a [big multinational like] Warner Bros., for example,’ he says.

Another challenge lies in IP registration and protection. Kidz/EEMC has seen cases where property owners haven’t registered their trademarks, often because they didn’t know how to do it. Russia also has a sizable black market, and it’s difficult to police counterfeiting because of the country’s sheer size. Couple this fact with a complicated process for prosecuting copyright violations, and taking any type of legal action can prove a to be a nightmare.

Retail coming around
The House of Mouse, which formed its CIS division in 2006, has been keeping a close eye on what Russian consumers want, and similar to buying patterns in Germany, MD for Disney CIS Marina Jigalova-Ozkan says, parents in the territory are keen on construction toys, publishing and language-learning products. As for where they’re buying them, she estimates modern mass-market retailers control 30% of the landscape and remains confident that number will increase over time. To that end, big international retailers like Auchan are making headway with local outlets – the French giant, for example, currently has 17 locations in Russia.

Kidz/EEMC’s Gordinksy also notes a hefty chunk of the retail landscape is occupied by grocery stores and hypermarkets. As for specialty, primarily electronics and apparel shops fill the tier. Notably, Detsky Mir, the Russian equivalent to Toys ‘R’ Us, has just 120 stores nationwide and is the only dedicated kids retailer in the country.

The good news, however, is that the larger retailers are also slowly embracing consumer products. Kidz/EEMC, for example, inked its first direct-to-retail program in Russia – also a first for the country – with major supermarket chain X5 Retail Group. The grocer put more than 20 licensed food and non-food SKUs based on Fox’s Ice Age 3 in its some-1,500 stores this past summer.

In terms of what’s currently driving entertainment properties at Russian retail, Gordinsky says, not surprisingly, feature film IPs tend to perform best. TV-led licensing programs are still a challenge to pull off as a dedicated free-to-air children’s channel has yet to be launched and the penetration of Russian-dubbed cablenets like Cartoon Network and Nick isn’t big enough to drive large numbers of consumers into stores. Film distribution, on the other hand, has been expanding steadily since the beginning of this decade and there are now approximately 2,000 screens installed across Russia.

Jigalova-Ozkan adds that fairy tales are deeply rooted in Russian culture, so the Disney Princess line is popular with girls, while Cars is resonating well with the early school crowd right now.

Worth the wait?
Perhaps the biggest piece of advice for companies looking to break into the Russian market is to prepare for a long haul. The country’s troubled political history has also affected the way its people do business, so patience is definitely a virtue. Licensing, as Durdag explains, is still very much in its infancy in Russia and it’s taken a circuitous path to get to its current state. But he’s hopeful. ‘I think we’ll see quick development around IP businesses now, simply because Russia is eager to integrate with the rest of the world in terms of trade.’

Tømming also advises, ‘You don’t just ride into town being a foreigner and do a deal. You need to show [Russians] that they can trust you, that you can earn their respect. You don’t do it day-one in a meeting.’

Kidz/EEMC has been in the country for the last decade and recently its efforts have been paying off. Tømming says his company doubled its revenues in the region between 2008 and 2009.